Egypt IMF Request Only a First Step

Egypt’s request for a US$3.2bn International Monetary Fund (IMF) standby facility is encouraging, although IMF assistance on this scale would only have a meaningful impact on the country’s finances if it catalysed additional international support, according to Fitch Ratings.

If granted, the facility’s most positive impact would be to reassure international investors that Egypt is implementing clear and sustainable fiscal and economic policies, an essential platform for kick-starting renewed foreign investment. This in turn could stabilise – or even ease – borrowing costs until the transfer of power from the military council, due in June.

Talks between the Egyptian government and the IMF mission began in Cairo Monday, seven months after the country’s military council turned down US$5.2bn of assistance from the IMF and World Bank, reflecting its reluctance to take on large new external debt and its preference to rely on domestic funding to finance the budget deficit.

Although demonstrating a continuing conservative approach to external debt, a long-standing feature of Egypt’s policy, this decision was a factor in keeping foreign exchange (FX) reserves under pressure in the second half of 2011. Fitch downgraded Egypt one notch to BB- on 30 December 2011, following a substantial and accelerated fall in reserves since October that further weakened the sovereign external balance sheet.


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